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October 08, 2006

Rebuttal to Mark Cuban: Some Thoughts on Youtube and Google

posted by MR WAVETHEORY at 10/08/2006 02:54:00 AM
I read Mark's blog posting Some Thoughts on Youtube and Google and I disagree with Mark's view. Mark believes that Google (Nasdaq GOOG) would be moronic to buy YouTube. I say they would be moronic not to buy.

There is only one #1 player in any given market as Internet entrepreneurs and investors have discovered with the outsized valuation given to Google. Leaders like MySpace and YouTube deserve significant premiums because they not only are synonymous with the product being delivered (MySpace/social networking, YouTube/video sharing, Google/search), but users gravitate towards those services because of their reputation. It takes no convincing to get a user to try MySpace, YouTube, or Google because chances are someone they know already uses it - and recommends it.

An advertising deal with YouTube would solidify Google as a #1 in video ads, but a buyout would solidify Google as the leader in Web 2.0 video.

Pop Quiz (Multiple Choice). Select the best answer below.
If you were Google, what do you want to be when you grow up? Do you want to be
  • A) WPP Group Plc (selling advertising) (Nasdaq WPPGY)?
  • B) Viacom, Inc. (broadcasting content) (Nasdaq VIAB)?
  • C) Comcast Corporation (the leader in cable television, content and delivery) (Nasdaq CMCSA)?
The correct answer is C.
Answer: You want to be Comcast - distributing the content and owning some of it too. Why? First, see who has the biggest enterprise value.

Enterprise Value
C) Comcast $100 billion (yes, very close to Google)
*) Google $118 billion
B) Viacom $ 34 billion
A) WPP $ 18 billion

Then, check who has the highest forward P/E multiple.

Forward P/E Multiple
C) Comcast 32x (exactly like Google)
*) Google 32x
B) Viacom 16x
A) WPP 15x

Finally, of the 3 possible choices, who has the highest price to sales multiple.

Forward P/S Multiple
C) Comcast 3.x (smaller than Google but the highest of the group)
*) Google 15.2x
B) Viacom 2.60x
A) WPP 1.45x

Nough said. Comcast wins hands down.

Why Comcast wins and what does it mean for a Google YouTube deal?
Comcast wins because it owns the content and the delivery. Distribution is a highly valuable asset because it brings along a captive audience. Assume Google went with answer choice A, and wants to grow up selling advertising. Then, it would become the WPP of the World Wide Web. Sexy? Not Really. The multiples stink and the margins too. Imagine having to renegotiate revenue sharing contracts every quarter and giving the barn away so you can make your next quarter. I shudder at the thought of that. Look where that got Yahoo! Inc (Nasdaq YHOO) when it lost MSN.

Now let's say, Google choice Answer Choice B and broadcast content. Well, they're doing it, but it's not really working that well. Google Video isn't exactly the name in video. When people want to check out online videos, they go to YouTube. When they want MTV, well, they go to MTV. You get the point. Google is not synonymous with online video.

Choice C: Buy YouTube. Easy. Slam dunk. Lawsuits be damned. After all, it worked for Google Book Search. Why won't it work for video.

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